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Euro popped in morning European trade today rising towards the 1.2200 figure after the region reported slightly better than expected PMI readings with manufacturing recording notably stronger results. Equities on the other hand retreated taking a pause after setting fresh record highs as profit taking kicked in ahead of the weekend.
In Europe the flash PMI reading came in a tad weaker at 47.5 vs. 47.6 eyed but the composite numbers masked the big divergence between services – which remain mired in contraction due to COVID lockdowns—and manufacturing which saw a significant boost from Chinese demand.
Manufacturing PMI’s rose to .54.7 well above the 50 boom/bust model. Markit noted that:
“The greatest signs of resilience amid the ongoing pandemic continued to be evident in manufacturing. Eurozone factory output expanded for a seventh consecutive month in January thanks to sustained growth of new orders, exports and backlogs of work. Although the overall pace of factory output growth slowed to the lowest in seven months, it remained among the highest seen over the past three years.”
The news tonight says as much about China as it does about Europe as the world’s second largest economy is clearly the locomotive that is driving global demand. The control of the virus within China has clearly created a competitive advantage for the Middle Kingdom and that advantage should persist for at least the next few quarters as the service sectors in the West—which are the biggest component of the OECD economies—will remain hobbled by the battle against COVID.
The creeping realization that the comeback may take longer than expected is also starting to impact the equity markets which were down by 40 basis points in overnight trade. The recent runup has put equities at fresh record highs and some profit taking is certainly due. Profit taking could accelerate into next week as the market begins to consider the bruising battle for stimulus in Washington DC. The Republicans in the Senate have signalled that they will not cooperate on President Biden’s relief agenda and as any shred of bipartisanship disappears, so may some of the recent market gains.
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